Oil and Gas in the Irkutsk Region

Source and Copyright: Irkutsk development seen viable. The Oil and Gas
Journal 01/04/93 volume 91:n1. p30(2)

Western Siberia's plunging crude production apparently has made viable an
eastern Siberian oil, gas, and condensate development program deemed
uneconomical only a year ago. Irkutsk province, which currently has very little
or no hydrocarbon production, plans to develop at least two big fields in its
territory. They are Verkhnechonskoye oil field, discovered in 1978 with an
estimated 600-650 million metric tons (4.38-4.75 billion bbl) of crude oil
reserves, and Kovyktinskoye gas/condensate field, discovered in 1987 with about
600-800 billion cu m (21.2-28.2 tcf) of gas equivalent in place.

About 30 wells have been drilled in Kovyktinskoye. Flows of more than 50 MMcfd
have been gauged. The area of the Kovyktinskaya structure has been placed at
30 by 42 km.

Kovyktinskoye
is near the town of Zhigalovo and south of the Lena River port city of Kirensk.

The Moscow business weekly Commersant reports the Kovyktinskoye development
project will receive financial support from the Russian government, Irkutsk
province companies, local property funds, and foreign interests,

Production schedule

It's expected that Kovyktinskoye will be producing 1.26-1.35 bcfd by 2000.

Kovyktinskoye gas likely will be delivered about 225 miles south by pipeline
to Irkutsk province's largest industrial and population centers, including the
cities of Irkutsk and Angarsk on the Angara River just north of Lake Baikal.

Kovyktinskoye will probably go on stream before Verkhnechonskoye oil field,
which is in a remote, virtually unpopulated area more than 500 miles north of
the 600,000 b/d Angarsk refinely.

It's hoped that Verkhnechonskoye will be producing 200,000 b/d by 2000.

Russian and Irkutsk province officials are giving Kovyktinskoye's development
priority because they want to tap natural gas as quickly as possible to replace
other fuels that are contributing to serious pollution in the Lake Baikal region.

Commersant said senior officials in Russia's fuel and energy ministry have
promised .to grant a 5 year tax break to Rusia Petroleum, an Irkutsk company
that plans to develop Kovyktinskoye and Verkhnechonskoye fields. Rusia Petroleum
was formed last April by founders that include western Siberia's Varyeganneftegaz
oil association.

Financing

Rusia Petroleum hopes to raise $123-125 million in first stage investment.
Another $400-450 million will be needed later for field development.

Canada's Bitech, Willow Dale, Ont., agreed to participate in the project. It
will help obtain western credits for Irkutsk province's petroleum venture,
Commersant reported.

The publication said, "For the project to get off the ground, Irkutsk
authorities want Moscow to allow Rusia Petroleum to sell 10% of its shares to
foreign investors and free its ruble and hard currency investment from budgetary
payments for 5 years.

Rusia Petroleum

Earlier Moscow reports said 12 production associations, including the
Angarsknefteorgsintez refining/petrochemical enterprise, Irkutskenergo (Irkutsk
Energy), and Sayan Khimprom (Sayan Chemical Industry), joined forces into the
joint stock company Rusia Petroleum.

The Moscow newspaper Ekonomika i Zhizn (Economics and Life) said the venture
was founded mainly because the sharp drop in western Siberian oil flow created
tough problems for the Angarsk refinery and petrochemical complex. Those
facilities, which serve a vast area of eastern Siberia, are supplied with crude
delivered by pipeline and railroad from distant western Siberian fields.

BP-Statoil pullout

Late last year, Moscow's Izvestia newspaper reported refusal by a combine
including British Petroleum Co. plc and Norway's state owned Den norske stats
oljelskap AS to sign a joint venture agreement with the Irkutsk Province
Executive Committee to develop oil, gas, and condensate reserves in the area
following extensive evaluation of the project.

Izvestia emphasized that the western firms' pullout was based on assessments
of profitability in marketing Irkutsk province hydrocarbons, not on any
determination that the area lacked sufficient reserves. BP officials decided
there was no feasible way to export the province's oil or gas, thereby obtaining
an adequate return in hard currency on the combine's investment.

The other option, delivery of crude and condensate to the nearest refinery at
Angarsk and sale of natural gas locally, also was ruled out. It was believed
that the Angarsk facility could not afford to pay the world market price of
$120/ton ($16.44/bbl) and make money by selling the refined products in eastern
Siberia.

Except for its capital of Irkutsk and the cities of Angarsk and Bratsk to the
southwest and west of the main oil and gas districts, Irkutsk province has few
important industrial and population centers.

However, the BP-Statoil tean said future industrial development of the area
and a shift to a market economy could change the outlook for profitable
development of Irkutsk province hydrocarbons.

BP officials also took note of the uncertain political and economic situation
in the former U.S.S.R., Izvestia reported. The newspaper quoted BP
representatives as saying that conditions were not conducive to investment.

Other impediments to the proposed joint venture, Izvestia said, were
uncertainty over taxes, a lack of precise laws on joint venture development of
resources, and inadequate roads, communications, and housing in Irkutsk
province's oil/gas districts. All this, it declared, greatly increased the
degree of risk for foreign investors, "who aren't in any hurry to exploit
us."

Izvestia praised BP for promising to condense its detailed feasibility study
so that Irkutsk province officials could use some of the data to prepare an
advertising brochure for other potential foreign investors in the area's
petroleum sector.

South Korea has expressed interest in petroleum exploration and development,
along with pipeline construction, in eastern Siberia, including Irkutsk
province. A Houston firm offered a data package on the area's hydrocarbon
potential in 1990.

Irkutsk background

Soviet exploration in Irkutsk province dates back to the 1930s. First oil was
found in shallow Cambrian formations in 1937.

After World War II, a number of gas/condensate discoveries were made. They
included Atovskoye field in 1961, Markovo in 1962, and Yaraktinskoye in 1969.

In the Markovo area, near the Lena River, brief flows of as much as 7,300 b/d
of light oil and condensate and 3.5-10.6 MMcfd of gas were logged from Cambrian
formations. In Irkutsk province's Bratsk, Atov, Balykhtin, Parlenov,
Khristoforov, and other areas, gas flows of 3.5-14 MMcfd were gauged.

Russia reportedly has found about 170 potentially petroliferous Irkutsk
province structures and 40-50 fields or locations with hydrocarbon shows.
Important discoveries in the province's northern sector are near the border with
the huge Sakha (Yakut) autonomous republic.

Arlon R. Tussing is professor of economics at the University of Alaska
Anchorage with which he has been associated since 1965. He is also president Of
ARTA Inc., an economic consulting firm based in Seattle, which specializes in
oil and gas markets, utilities regulation and restructuring and energy finance.
Tussing has served as chief economist of the U.S. Senate committee on energy and
natural resources, and in numerous public policy and advisory posts. He is
co-author (with Oil & Gas Journal's Bob Tippee) of "The Natural Gas
Industry, Evolution, Structure, and Economics" (PennWell Books, 1995). The
economic stagnation that has troubled Japan through the 1990s and the financial
crises that now afflict South Korea and several other East Asian countries
should not be allowed to obscure the longer-term momentum of growth that is
built into the economies of Northeast Asia.

In 1995, Japan, China, and South Korea accounted for 24.9% of the world's
population and 19% of worldwide gross domestic product (see Table 1,
p.[30.sup.2]). However, during 1986-96, the three countries accounted for 34.6%
of the world's increase in primary energy consumption. Annual growth averaged
4.9% in a decade during which the rest of the world's energy demand was growing
at a rate of only 1.1%.

It has been Japan's great wealth, China's huge population and high rate of
economic growth, and South Korea's industrial vigor that have combined to drive
the increase in Northeast Asia's energy demand.

Despite Asia's current financial troubles, the same fundamental forces will
be at work in Northeast Asia well into the new millennium. From 1997 to 2010,
energy demand in these three countries will account for about two-thirds of the
worldwide growth in energy demand.

In 1996, Japan, China, and South Korea consumed 18.4% of the world's primary
[energy.sup.3], about the same as their combined share of global GDP. Together,
they accounted for only 4% of worldwide natural gas consumption (including LNG),
however (see Table 2, p. 32). As a result, natural gas, which made up more than
one fourth of the primary energy consumed globally in 1996, constituted only
3.7% of North-east Asia's total energy supply.

The share of methane fuels in global energy supply has been rising dramatically,
from 20.7% in 1982 to 26.1% in 1996. The reasons are well known. For every major
energy end-use--except perhaps road transport--natural gas or electricity generated
by natural gas proves technically superior and environmentally more benign relative
to other commercial energy forms. Wherever gas is available in bulk, either
by pipeline or near tidewater as LNG, and at either market or cost-based prices,
it will rarely lose an unbiased market test against other industrial, space-heating
or electrical power generation fuels. There is thus a near-consensus among analysts
and decision-makers that natural gas at least ought to, and likely will, play
an expanding role in Northeast Asia's energy economy

Northeast Asia gas potential

Combined demand for primary energy in China, Japan, and South Korea is expected
to increase by about 3.1 billion metric tons of oil equivalent (mtoe) through
2010.

For natural gas to capture only one fourth of this incremental energy
consumption, about its present average percentage of total energy use worldwide,
annual deliveries of gas to Northeast Asian markets would have to increase by
the equivalent of 31.3 tcf by pipeline or 625 million metric tons of LNG.

Just the new electrical generation capacity that China, Japan and South Korea
expect to be added by private, nonutility independent power producers (IPPs)
would, if that capacity were gas-fired, consume 3.3-4.2 tcf/year in
[2010.su.....p.4].

To put these technical opportunities into present perspective, total consumption
of natural gas in Japan, China, and South Korea in 1996 was equivalent to 2.3,
0.6, and 0.5 tcf, respectively--a total of only 3.4 tcf. The annual capacity
of the proposed 56-in. pipeline from East Siberia via Irkutsk and Beijing to
South Korea and Japan, described in this article, will be less than 1 tcf. The
physical fuel requirement associated with projected IPP capacity in China alone
is thus six to eight times China's total gas use in 1996. It is about the same
order of magnitude as current gas consumption in all of Northeast Asia. This
suggests an immense market opportunity to be shared by imported LNG and domestic
Chinese natural gas production, as well as gas from eastern Russia.

Northeast Asia energy demand

Because of Northeast Asia's huge population and enormous wealth, the region's
demand for fuels and energy over the next decade or so will be unprecedented,
and will dominate global energy investment and capital formation.

This will be the case notwithstanding the fact that the three principal
countries will continue to differ immensely in population, per-capita wealth,
and absolute energy demand. It is likely to be the case even if Japan's economy
continues to stagnate, even if China's economic growth settles down into the
single-digit range, and even if South Korea lurches from one financial crisis to
another.

Moreover, no matter how competent or feckless the region's political and
business leadership, the attempt to serve its effective and latent demand for
energy will constitute a "boom" involving hundreds of billions of
dollars in international trade and investment. The efficiency of these outlays,
the ultimate cost of delivered energy, and the effects of energy production,
transport, and use on the quality of life, depend powerfully on the degree to
which each country can successfully restructure its energy industries and its
financial sector. These outcomes depend upon the degree to which the region's
dissimilar and often untested governmental and business institutions can
function internationally and successfully design, finance, construct, and
operate workable multinational megaprojects.

The associated upstream new capital requirement--i.e., the fixed cost of providing
new or replacement supplies of primary energy to Japan, China, and South Korea,
without allowance for investment in electric power plants, gas, and electricity
distribution, or petroleum refining and products marketing, will be on the order
of $2.5-3 [trillion.sup.5]

NE Asian energy economies

China

China is the world's most populous country and in absolute terms has the world's
fastest growing economy.

It is the number two energy consumer after the U.S., using 874 million mtoe
in 1996. China's industry, electrical generation, and space heating are powered
chiefly by domestic coal and imported oil. Not surprisingly, air pollution is
severe and worsening. Acid rain and acid snow coming from China are already
serious problems for South Korea and Japan and are likely to show up eventually
in North America.

China consumed 570 bcf of natural gas in 1996, entirely from domestic
sources. This was only 1.8% of its primary energy, the smallest share of any
major country and less than half the volume consumed by the Netherlands. Gas
still plays a nearly imperceptible role in China's official energy planning.

Japan

Japan has Asia's most powerful and the world's second biggest economy but has
neither significant domestic gas production nor imports by pipeline.

About 12% of Japan's 1996 energy supply was nevertheless imported as LNG,
which it uses chiefly to generate electricity. Japan is consequently the world's
largest importer of LNG, accounting for about 61.2% of global imports in 1996.
From the beginning, the government's objective in promoting these imports was
mainly diversification for the sake of energy supply security. The results of
this strategy are readily apparent in the actual 1995 mix of electrical
generation fuels: nuclear 21%, LNG 22%, coal 10%, oil 27%, and hydro 21%. The
shares officially planned for 2005 hardly vary--although, fortunately, no one
takes them seriously.

As in North America and Europe, Japan's electric companies were not
structured or regulated so as to create efficiency or cost incentives. The
ultimate cost of electricity likewise played little or no historic role in
government policies regarding the fuels or generation mix. All except the very
newest gas-fired facilities are conventional steam plants, which combine high
fixed and maintenance costs with low thermal efficiency.

Throughout Japan's energy industries, the existing mix of primary fuels feeds
a clumsy and amazingly inefficient array of refining, distribution, and
marketing sectors, resulting in the world's highest delivered prices for
industrial and space-heating energy. It is thus unsurprising that Japan uses
little gas in manufacturing or heating. Natural gas is delivered to industry at
an average price of about $15/MMBTU where it is available. Industrial gas sales
have stagnated for more than a decade at only about 0.6 million tons/year, which
was less than 1.5% of total 1996 imports.

The nearly total lack of an internal gas transmission and distribution
network is a feature in which Japan is unique among major gas-consuming
countries, including its neighbors Taiwan and South Korea. In Japan, LNG is now
imported at 20 widely dispersed and unconnected terminals, where about half is
used in adjacent power plants. However, a substantial part is trucked through
the streets to the substations of the city gas companies. while smaller
gas-distribution companies still rely on propane in bottles or on synthetic gas
made from coal. The absence of a domestic gas grid is an especially serious
obstacle to procurement of secure, long-term gas supplies by pipeline from
northeastern Russia in the face of rival demands from the explosive economic
growth of neighboring [China.sup.6].

The average town-gas price to homes and small businesses in Japan is about
$35/MMBTU. Accordingly, few Japanese homes have gas heat, and many lack space
heating of any kind despite winter temperatures comparable to the U.S. Midwest
or Middle Atlantic states. Residential, commercial, and institutional deliveries
of town gas in 1996 were 24.5% of total supply, the equivalent of 14.5 million
tons of LNG plus 2.5 million tons of domestic-source gases, including LPG and
synthetic coal gas. Serious air quality problems and an overpriced, increasingly
unpopular, nuclear construction program add to the massive latent demand for
additional natural gas imports.

South Korea

South Korea, although the smallest of the three leading Northeast Asian
countries, is an extraordinarily dynamic economy of a special kind.

With only a 27th of China's population, South Korea in 1995 boasted an
economy that was more than half the size of China's. However, South Korea's
industrial activity and economic growth are still concentrated much more in
goods-producing, energy-intensive sectors than in "post-industrial"
U.S., Western Europe, or Japan.

Since the early 1980s, South Korea has thus sustained the world's second highest
rate of energy consumption growth. During 1986-96, the country's primary energy
use increased by 177%, representing an annual growth rate of 10.7%. Although
only the world's twenty-sixth largest country in population and fourteenth in
GDP, South Korea was number 10 in energy use. During 1986-96, South Korea was
fifth in the world in the absolute growth of energy consumption, after the U.S.,
China, Japan, and India. Indeed, South Korea's energy use increased by more
than the combined energy growth of Germany, France, Britain, Italy, Spain, and
Scandinavia.

Like Japan, South Korea lacks indigenous sources and any pipeline connection
to foreign supplies of natural gas. Tanker imports of LNG commenced in 1986 and,
by 1997, accounted for 9.5% of the country's primary energy inputs. Again, as in
Japan, South Korea at first directed its LNG imports almost entirely to
electrical power generation. South Korea's government planners and its
government-owned gas and electricity monopolies are now pursuing a deliberate
strategy of maximizing gas use.

In marked contrast with either China or Japan, South Korea is attempting to
do so by reducing the delivered cost of gas and electricity to end-users. By
1996, half of South Korea's LNG imports was going to residential, commercial,
and industrial customers served by city gas companies. Of the three Northeast
Asian countries that are actively contemplating pipeline links to natural gas
supply basins in the Russian Far East, it is South Korea for whose energy supply
strategy the project is most crucial, and whose interest in the venture has been
the best focused and most [sustained.sup.7].

Northeast Asia's energy resources include indigenous coal deposits in every
country in the region, most notably China and North Korea.

Russian Far East role

China has significant onshore and offshore natural gas potential, which is
underexplored and mainly undeveloped. In terms of potential new sources of fuels
and energy, however, Northeast Asia is dominated by eastern Russia.

The Russian Federation now accounts for nearly half the world's known or
indicated gas reserves and is a major producer and exporter of crude oil and
coal. Almost all of this activity has thus far been concentrated west of the
Yenesei River in European Russia and in Western Siberia. The undeveloped
hydrocarbon resources in the sparsely populated reaches of Eastern Siberia and
the Russian Far East (RFE) are potentially of the same class, however. It is the
natural gas of this area that is most suitably situated to provide new energy
supplies for China, South Korea, and Japan.

There are four REF producing regions: Sakhalin Island and the Sakha Republic,
in the Far East, and the Irkutsk and Krasnoyarsk Regions in Eastern Siberia,
whose identified but undeveloped gas reserves are adequate to supply the
Northeast Asian market.

The Sakhalin II international joint venture is slated to start oil production
from a mobile platform in summer 1999, but production will be confined to about
5 months/year pending construction of a pipeline to an ice-free port in southern
Sakhalin. Gas sales from this project and the larger, but less advanced,
Sakhalin I project depend on decisions regarding marketing targets and between
transport options among the Russian, Japanese and U.S. participants. The
alternatives under consideration include a 500-mile pipeline to an LNG terminal
on southern Sakhalin; a subsea pipeline extension to Japan; and a pipeline
crossing from northern Sakhalin to the Russian mainland, where it would pass
Khabarovsk and Vladivostok on its way to North and South Korea, and perhaps to
Japan in the vicinity of Kitakyushu or Shimonoseki (see map, pp. 28-29).

The current impasse regarding marketing of Sakhalin gas is complicated and
prolonged by the absence of any domestic pipeline capable of receiving Russian
natural gas on its arrival either in Hokkaido or western Japan.

Irkutsk region, pipeline

The most widespread interest in development of Russian natural gas for Northeast
Asia focuses on Kovyktinskoye field in the Zhigalovsky district 350 km northeast
of Irkutsk.

Official proved and indicated reserves in this field, discovered in 1987, are
870 bcm. However, in 1997, Russia Petroleum, an affiliate of Sidanco, announced
confirmation of 1.2 trillion cu m (42 tcf) of proved reserves in Kovyktinskoye.
This figure has recently become the anchor for serious negotiations and planning
regarding a multinational pipeline. A 56-in trunk line would extend 4,100 km
from Irkutsk past Ulaanbaatar, across Mongolia and northern China to Beijing,
into South Korea either by a subsea route or via North Korea, and on to Japan.

Following the Yeltsin-Hashimoto summit meeting last year, Russian, Chinese,
Japanese, South Korean, and Mongolian participants signed a memorandum of
understanding regarding the Irkutsk project on Dec. 25, 1997. Signatories were
the Russian Energy Ministry, China National Petroleum Corp. (CNPC), Japan
National Oil Corp., Korean Gas Corp., and the Petroleum Authority of Mongolia.
The substance of the memorandum was essentially the intent to prepare a further
study of project feasibility focusing on reserves and markets, selection of a
pipeline route, and verification of economic feasibility. Sidanco and CNPC
committed to prepare a draft agreement for organization of the feasibility study
in early 1998.

Sakha Republic

Two other potential gas-producing regions in Russia are also under serious
consideration as supply sources for Northeast Asia.

One is the semi-autonomous Sakha Republic, also known as Yakutia. Sakha is
the largest subdivision of the Russian Federation and the richest by virtue
of its production of about one quarter of the world's gem diamonds. Sakha's
population is only about 1 million, and it is thus one of the most isolated,
sparsely settled, and least intensively developed regions of the Northern Hemisphere.
An estimated 1.64 million sq km, over half of Sakha's total area, is underlain
by theoretically hydrocarbon-bearing sediments. Although commercially recoverable
oil, gas, and condensate reserves have already been discovered in more than
30 reservoirs, these known and, in some cases, developed reserves are mostly
shut in, and Sakha's ultimate oil and gas potential remains underexplored and
untested.

Several feasibility studies beginning in 1970 have focused on pipeline construction
for export of natural gas from the Sakha Republic. Beginning in the early 1990s,
a consortium of South Korean companies initiated a joint feasibility study regarding
the development of gas resources in the Vilyusk basin of the Sakha Republic
and construction of a pipeline to markets in Northeast Asia. Participants in
this study included Sakhaneftegaz, Gazprom, and Japan National Oil Corp. (JNOC),
as well as the South Korean sponsors. At first, the greatest interest was in
a pipeline from Yakutsk and southward along Russia's eastern margin past Vladivostok,
crossing North Korea to markets in South Korea and Japan. An alternative route
from Yakutsk would have bypassed the Korean peninsula entirely, crossing instead
from the mainland to Sakhalin, then following the length of that island to a
subsea pipeline crossing into Hokkaido. Other studies during the mid-1990s favored
a course from Irkutsk to Vladivostok along the Trans-Siberian Railroad, then
crossing both North and South Korea to Japan.

Three fields in southeastern Sakha, with combined reserves reported at 496
bcm (17.5 tcf), have been explicitly identified as potential gas sources for the
new Irkutsk pipeline project. They are Chaiyandiskoye, discovered west of Lensk
in 1989, with 210 bcm (7.4 tcf); and Sredne Botuobinskoye and Tas Yuriak, both
southwest of Mirnyy, discovered in 1970 and 1981, respectively, with 171 bcm (6
tcf) and 114 bcm (4 tcf).

Other Northeast Asia

In addition to China, South Korea, Japan, and the RFE, Northeast Asia also
includes North Korea and Mongolia. From a number of viewpoints, it is also
reasonable to list Alaska as part of the Northeast Asian economic
[region.sup.8].

The last four entities have a larger combined land area than China, Japan,
and South Korea, and each has a strategic role to play in development of
Northeast Asian energy markets, either as a supplier of hydrocarbons or as a
transit route between exporting and importing countries. With a total population
of less than 35 million, however, these "borderlands" seem hardly
worth remarking as elements in total regional gas demand.

The RFE and North Korea are nevertheless critically deficient in available
energy at the point of consumption. Power in Vladivostok, for instance, is down
for several hours almost every day. The most frequent of many contributing
causes is failure of coal deliveries from local sources. As elsewhere in
Northeast Asia, regular access to natural gas either by pipeline or as LNG
promises help for a host of troublesome energy cost and reliability problems,
plus the usual environmental benefits.

The RFE and North Korea will ultimately account for a noticeable share of the
regional increase in effective energy demand. At present, however, they do not
command the purchasing power to import fuel regularly from reliable suppliers.
Likewise, they lack the institutional arrangements needed either to mobilize
local capital or to recruit outside investment to create the needed
infrastructure. Despite huge nearby gas resources, the prospects for making
natural gas available for local consumption in the RFE depend upon the
successful implementation of ventures driven and financed by export demand.

In one sense, local energy needs can be a financial albatross for export-oriented
gas projects in Eastern Russia. Regional governments and stakeholder groups
will seek to make the meeting of their fuel needs a precondition for approving
production-sharing agreements (PSAs), or other permits and licenses. In the
present state of the Russian economy and governance, intended local "purchasers"
(including electric utilities, industrial concerns, and all levels of government)
are seldom solvent or creditworthy, even when they do not expressly count on
an allocation of fuel gratis. After all, while the proximate cause of Vladivostok's
power crisis is failure of coal deliveries, these stem from the utility's chronic
failure to pay for the coal, which in turn is caused by the inability or unwillingness
of its customers to pay for electricity. Likewise, when the Irkutsk regional
government (oblast) demands that Sidanco assure it that the export project designed
to supply gas from the Kovyktinskoye field to China or Japan and South Korea
will commit half of its output to local markets, it thereby doubles the producing
and transmission capacity that must be financed and developed within the oblast's
boundaries, without making any credible contribution to its financing.

North Korea's chief significance for the region's energy planning lies in its
lunatic government and its desperate poverty, both of which make the state's
very existence a source of uncertainty and insecurity for the whole region.
North Korea's access to natural gas thus depends on persuading producing
interests in Russia and consuming interests in Japan, South Korea, or China to
entrust gas deliveries to a North Korean pipeline crossing.

One vehicle for mutual persuasion might take the form of an escape from a
mutually embarrassing set of commitments involving the U.S. and the two Koreas.
In return for North Korea's abandonment of its plan for a Chernobyl-style
graphite-moderated reactor, which would produce weapons-grade plutonium as a
byproduct, the U.S. agreed to build two 1,000-MW light water reactors for North
Korea. South Korea would finance the plants at a cost of $5.1 billion. Pending
completion, the U.S. would provide fuel oil for existing North Korean
generators. Ground was broken for the plants in 1997, but South Korea now pleads
that it cannot afford to pay for them. Moreover, according to North Korea, the
U.S. has failed to provide the fuel oil. In any event, a natural gas pipeline
crossing North Korea from Russia to South Korea and Japan would make possible
the same amount of generating capacity for about $1 billion. The savings on
these plants alone would go a long way toward paying for a pipeline from the
North Sakhalin field s, past Khabarovsk and Vladivostok, past the North Korean
power stations, and into South Korea's domestic pipeline [grid.sup.9]

In contrast, the principal near-term significance of Mongolia in Northeast
Asian energy development may be as host to a relatively trouble-free pipeline
right of way--from both an engineering and political standpoint--between the
hydrocarbon reserves of southeastern Siberia and markets in eastern China, South
Korea, and Japan.

In return, Mongolia can hope for trouble-free access to low-cost Siberian gas
for space heating and industrial use in Ulaanbataar and for repowering its
existing coal-fired electric power plants.

Outlook for gas use

The paramount obstacles to the utilization of natural gas in large volumes are
mostly to be found in the downstream energy markets.

These obstacles are, above all, concentrated in the policies and plans--or
lack thereof--on the part of Northeast Asian governments. All three governments
give lip-service to increasing the share of natural gas in their respective
economies, and each of them is officially committed to the Irkutsk project.
However, only in South Korea is domestic energy planning moving in a direction
consistent with this goal.

China's electrical power planning still provides no explicit role for
gas-fired [generation.sup.10] Without such a change, air pollution will become
intolerable throughout Northeast Asia, while movements of coal will choke
China's railroads into immobility.

Japan has yet to begin planning a domestic gas pipeline system, without which
it will neither be able to receive pipeline gas from Russia nor to lower the
delivered cost of LNG sufficiently to market increased volumes to industry,
homes, or small business. Unless China turns decisively toward a gas-based
electrical generation strategy, or Japan aggressively expands and diversifies
its domestic market for natural gas, it is difficult to identify any East Asian
market of sufficient size and depth to justify a high-volume pipeline connection
from Siberia or the Russian Far East.

LNG market strategy

Expansion of LNG use in Northeast Asia could conceivably proceed along the
established project-by-project path pioneered by Japan and largely copied by
South Korea and Taiwan.

Various trade association and government forecasters have projected additional
LNG imports on the part of China, Japan, and South Korea at as much as 100 million
tons by 2010. These forecasts are based almost entirely on anticipated growth
of demand for baseload electric power generation fuel and--with that qualification--are
wholly plausible. Indeed, if the lrkutsk pipeline project does not proceed,
100 million tons may be a conservative estimate of the potential increase in
LNG imports to Northeast Asia.

A similar strategy of LNG development retains considerable promise for
marketing LNG from Southeast Asia, the Middle East, Sakhalin, or North America
to baseload electrical power generation markets in the coastal regions of China
and perhaps the Russian Far East.

However, the ability of Japan and South Korea to absorb additional LNG is limited
to the degree to which they can substitute LNG for nuclear, oil, or coal-fired
electrical generation in existing or new baseload power plant service--absent
substantial changes in their physical infrastructure, market organization, and
national energy policies.

References

1. ARTA Inc. and Alaska-Cambridge Program on Northeast Asian Energy. The
Alaska-Cambridge Program on Northeast Asian Energy is a joint undertaking of the
University of Alaska Institute of Social and Economic Research, Anchorage, and
the Scott Polar Research Institute, Cambridge University, U.K.

2. National population and GDP figures in this article are 1995 United
Nations data unless otherwise indicated.

3. National historical data on energy consumption, production, and trade in
this article are from the BP Statistical Review of World Energy for 1997 unless
otherwise indicated.

8. It is worth noting that Japan has imported LNG from Alaska since 1969 and
probably would have become the principal market for North Slope crude oil, if
the Trans-Alaska Pipeline Act of 1973 had not prohibited its export. Moreover,
we have elsewhere addressed other dimensions of the kinship between Alaska and
the Russian Far East, of which it was once a part. See, for example: Arlon R.
Tussing, "Alaska's Petroleum-Based Economy as a Development Model for the
Russian Arctic and Far East," Russian-American Conference on Arctic Oil And
Gas Development, Anchorage, Apr-10, 1993; and John Tichotskv, "Russia's
Colony Within: Regional Economic Development in the Republic of Sakha, Russia's
Diamond Producing Region," London: Harwood Academic Press, 1998.